Who Will Pay for Paris?

In a landmark deal at the Paris Climate Conference this past December all 195 countries in attendance came to a legally binding agreement for global action to avoid dangerous climate change. The key goal that all consented to is to limit warming to the critical two degrees Celsius above pre-industrial levels — a mark that many scientists have identified as the crucial threshold above which many damages would be irreversible and potentially even unmanageable. Should the two-degree mark be surpassed, rising sea levels, droughts, flooding, and major disruptions to global food supplies are just a handful of the myriad of problems that would afflict global populations

The objective set in place by the conference isn’t just ambitious; it’s unprecedented. While laudable, keeping the warming levels below two degrees Celsius is a herculean task. But the real victory of the summit is that it goes a long way towards debunking notions that there is a global warming debate. The facts are in, the evidence weighted, and the consequences tabulated, all in plain view and with unanimous agreement. The unsustainable behaviors that have taken a toll on the global climate must make way for new and innovative lifestyle changes to reverse the current rate of deterioration. According to John Schnellnhuber, head of the Potsdam Institute for Climate Impact Research, to meet this goal requires that the growth of global carbon-dioxide emissions must cease before 2030, and be eliminated as soon as 2050, or very shortly thereafter. This means that within a span of roughly 30 to 40 years, the world will need to have weaned itself off fossil fuels completely, representing a rate of decarbonisation across all nations far greater than many had previously anticipated.

The time span is tight, but the initial signs are good. Both the US and China signed the agreement on April 22, the first day the United Nations was open for signatures. The hope is that these two countries are ready to take serious measures toward clean energy as the two largest contributors to greenhouse emissions, with combined emissions accounting for 40 percent of total global emissions. Many would argue that the success of the summit was attributable to the two biggest culprits coming together and publicly admitting that human-driven climate change was undeniable and the consequence unavoidable unless meaningful measures are taken. In the coming years, they and the other 193 signatories must submit a report detailing their plans for emission reductions. These reports are to be followed by new and presumably more aggressive plans to be submitted, and subsequently reported on, every five years after. In short, there’s much work to be done.

Recognizing that energy is what fuels the global economic engine, we should examine the potential impacts and anticipated consequences that such an accord carries within an economic context. While finally mustering political will behind the renewable initiative, many argue that the conference simply did not go far enough in terms of putting teeth into green economic policy. Proponents of climate change regulations have cited that the agreement is far too diluted in that it failed to incorporate even the most basic economic policy measures. The primary issue: the agreement made no arrangements for instituting fiscal policy, such as a carbon tax, which would drive up the cost of fossil fuels and drive demand and investment toward renewables. Proponents of regulation argue that without such strong economic policies, fossil fuels will continue to be the cheapest fuel available, and will persist for many more years to come.

Much of the global consensus, however, is actually much more optimistic about the economic steps that can be taken to address the transition to clean energy. Economist Paul Krugman cites that the cost of renewable energy has fallen dramatically over the past few decades, with the renewable sector moving towards ever cheaper and more powerful means of harnessing wind, solar, and hydroelectric power. Like many, he believes that something as unpopular as a robust carbon tax was never really a viable option for most of the world, but that similar measures, like tax credits for renewables, make investing in the renewable sector more attractive. While clean energy sources and reducing carbon emissions are currently the more expensive option, the trend for the future says otherwise. According to McKinsey, this trend is marked by an increase in global clean energy investments, which have increased over 17 percent despite the dropping price in oil. The United States alone is on track to install 12 gigawatts of renewable energy sources as the price of solar and wind continue to drop.

Proponents of the agreement are hopeful that the conference can and will expedite growth of the renewables sector and accelerate our transition to green energy. They believe that the most important and observable economic effect of the Paris agreement is the intrinsic message that resonates with world markets and investors alike, together with the unified consensus among the world’s governments. The age of fossil fuel is drawing to a close. The conviction to stay the course on clean energy investment will be reinforced by the notion that investment in pollution-generating coal mines will be much riskier than before and socially irresponsible. Those who decide to invest in clean energy will simply be better positioned in the years to come than those who invest in fossil fuels. This is key, because as the IMF puts it, the financial markets are poised to play a full and constructive role in the effective adaptation of energy.

The Paris Agreement also suggests that there has never been a better time for the private sector to step in. Secretary of State John Kerry noted the incredible opportunity for the business sector to make a difference, as this problem cannot be solved at a purely government level. The agreement, while legally binding, has no provision for penalties or stern consequences should a government not make good on its promise to cut emissions. Though governments have acted in good faith thus far, pledging billions of dollars to green initiatives, they recognize that their investment and their policy can only extend so far. The cost of renewables, while on the right track, needs to fall faster.

As if to answer the call, a group of prominent business leaders the world over have come together and responded with what is now called The Breakthrough Energy Coalition. Among the founders are Bill Gates, Richard Branson, Mark Zuckerberg, Jeff Bezos and Jack Ma. The Breakthrough Energy Coalition asserts that government investment and research alone is not enough to tackle today’s energy issues and that private investors can drive innovation from the lab to the marketplace. The risk-reward balance for early stage investing in clean energy research will usually not meet the market tests of traditional angel or VC investors, thus clean energy researchers and innovators are stifled by the underlying economic issues of the energy sector. In the weeks following the Paris Agreements, The Breakthrough Energy Coalition committed itself to building a large structured network of private capital to fill the void in the clean energy sector.

The jump in private sector interest towards clean energy will likely endure as the greatest economic legacy of the Paris Agreements. Groups such as the Breakthrough Energy Coalition can be the arbiters of an energy revolution. They represent the combined efforts of business leaders to solve a common problem with a practical strategy of bridging the gap between a promising idea and a viable product. Most important about these initiatives is that they do not merely represent a money dump into the renewable sector; they are targeted at finding and investing in the best and most innovative technology to help drive down the cost of renewable energy. World leaders as well as climate scientists increasingly point to the rise of such groups as our best chance to tackle the issue of global climate change.

With its lofty goals and unifying message, the Paris Agreements opened up the discussion for dramatic policy transformation. Perhaps most importantly, the agreement can lend momentum to the private sector and to groups such as The Breakthrough Energy Coalition in their ambitious research and development projects. If the public and private sector can work in tandem towards a common goal, one that is in every nation’s best interest to solve, perhaps we can meet the ambitious expectations laid out in Paris. It is in the interest of the private companies as well as national governments to lay the foundation of their futures’ today by investing in the energy of tomorrow.